The benefits of active management

Passive management seeks to replicate a stock market index as best as possible: this is what’s referred to as index-linked management. Under this approach, the portfolio manager can’t choose which stocks to invest in, and room for personalisation is very limited, even non-existent.

Under “active” management, however, a portfolio’s composition may differ considerably from that of the benchmark indexes, as the manager is aiming to outperform them.

To achieve this, the manager must define analysis-backed convictions under which they focus on certain countries and sectors, and select financial assets classes (equities, bonds, currencies, etc.) that they believe will generate the best performance. To do this, they need to buy or sell at the most opportune moment. They may also choose to implement risk hedging² strategies.

To help them define their strategy and decide which investments to make, “active” managers often apply a solid macroeconomic approach³.

But aside from economic aspects, managers also need to take geopolitical factors into account, as well as companies’ financial positions and market sentiment (through charts, studies on investor positioning and sentiment, etc.). They also need to refer to central bank policies, which are primarily concerned with maintaining prices for sustainable growth.

Active management is most effective when economic changes are predictable: during periods of inflation and recession, a manager’s ability to anticipate and adapt, as well as their convictions, are well suited to this management style. Given its limits, passive management would be restricted in its ability to seize opportunities and withstand financial market downturns.

An active manager can also make use of “hedging” instruments. These products offer protection against fluctuations in equity market and raw material prices, as well as exchange rates and interest rates. They can also help the manager retain stocks in which they have strong convictions, while reducing the portfolio’s overall exposure to market risks⁴ .

The success of Carmignac’s active management approach is based on managers’ ability to anticipate changes in the economic cycle (expansion, recession or depression, recovery). This should help them correctly position themselves for the next stages in the cycle.

Central to Carmignac’s investment strategies, active management proved its worth during the crises of 2002, 2008 and, more recently, 2020, three periods that saw our funds successfully withstand financial market downturns. In addition to this performance, these episodes also illustrated our ability to support our clients, helping them avoid the pressures of a stock market crash or having to sell assets at rock bottom, which in turn meant that they were able to take advantage of a subsequent financial market upswing.

At Carmignac, active management is based on:

• the dedicated commitment of a highly experienced and qualified management team, and a global view of the economic environment, enabling managers to establish their convictions and identify opportunities
  

• the courage to implement strategies that may differ from those of other investors
  

• the independence to be free in our choices and decisions

Our active management style isn't just limited to the selection of financial assets. As active shareholders, we aren’t afraid to speak out when companies’ environmental, social or governance (ESG) policies aren’t in line with our values or commitments.